Investors have experienced plenty to worry about over the last month. The result has been a pullback for the broad markets of 6-8% depending on the index. On March 16, the selling reversed off the intraday lows as buyers stepped back into the market. Despite the selling, there seems to be some enthusiasm for stock ownership. Today I wanted to cover three sectors to watch, based on current activity and future opportunities.
Energy has benefitted from the rise in crude oil. There are plenty of opinions relative to the future price of crude. The most common outlook is for crude to move higher short-term, based on supply disruptions from Libya. If that is true, owning crude itself is a prudent play, but expect plenty of volatility.
The energy sector overall has been a benefactor of higher prices over the last six months. SPDRs Select Energy ETF (XLE) has gained more than 37% since breaking from the consolidation in September. iShares Oil Equipment & Services ETF (IEZ) has gained more than 50% during the same period. Both dropped in conjunction with the broad market over the last three weeks, but look to have caught support. Throw in the current speculation on higher oil prices and the stocks are on the rise towards the February high again. Can they sustain the move to the upside, or is this a snap-back rally? It is prudent at this time to believe the rally continues.
The outlook is for growth based on the current geopolitical issues facing the Middle East. Bringing Libya back on line would take time even if there was a resolution today. The situation in Bahrain is not improving and could escalate further, causing more issues for the oil region of the Middle East. All of this is leading to the alternative energy space gaining momentum. Solar, wind, natural gas and electric have all been bantered about as the alternative to crude oil. While they make for good headlines, the progress in these areas is far from putting any immediate dent in the demand for oil.
Telecom was put back on the radar with the AT&T (T) acquisition of T-Mobile USA. The winners and losers were quickly defined by analysts. Sprint (S) dropped more than 17% following the news, cast aside like an old shoe. Several weeks ago, the speculation started that Sprint and T-Mobile would be married to versus AT&T.
The bigger question is: Where does that leave the telecom sector overall? Scrambling for market share and opportunity? Don't count Sprint out of the game just yet. Its efforts to rebuild the company have made progress, and earnings growth is building with cost savings from network-sharing deals. Sprint is definitely worth watching as a high-risk growth play looking forward.
iShares Telecommunications ETF (IYZ) broke support at $22.70 last week and is sitting on that level currently. The weakness in the sector has mirrored the major market indexes, and we have put this back on our watch list for future growth opportunities; however, the better approach would be to scan the parts and look for the leaders. It would be beneficial to make a list of those tossed to the side by the AT&T deal. American Tower (AMT) and Crown Castle (CCI) are two on the downside worthy of watching. On the upside, Apple (AAPL) may be the biggest winner of the AT&T deal, as 34 million people would have access to the iPhone.
Banks got approval last week to pay dividends and buy back stock. The impact to the sector was nothing short of boring. At first blush, you would think the sector would rally on the news; after all, the Treasury and the Federal Reserve believe balance sheets are in good order looking forward. The SPDR KBW Bank ETF (KBE) remains in the red year-to-date and failed to make any significant move to the upside on the news. Drilling into the ETF, we find most of the stocks have pulled back 6-10% off the February high and are attempting to hold support at the December levels. All of this adds up to a cautious outlook for the sector. The large bank ETF remains on our watch list, but for now not on our buy list.
Disclosure: I am long XLE, IEZ.
Additional disclosure: Money Strategies, Inc. Clients may or may not hold positions in the stocks or ETFs mentioned.